Random thoughts and questions that probably shouldn't be thought of or questioned.

Saturday, December 31, 2016

My Little Crystal Ball

I don't know if you have to be an economist, a market theorist, or a expert in finances (all of which I am not) to know that a big change is in the wind, economically, with our new [cough] President Donald J. Trump.

He talks a good game, or at least what he perceives to be a good game. He has already taken credit for keeping 8,000 jobs in America by bullying large corporations from taking their manufacturing to Mexico. The purpose of that, one surmises, is to save money in production, since the ratio of American to Mexican salaries is something along the order of 35:1. Ford builds their small cars in Mexico, and brings them back to the United States to sell at a price that Americans of modest means (like me) can afford.

When I was a kid (the time when Trump would probably tell us "America was great") if something said 'Made in Japan,' my parents would put it back on the shelf because it was cheaply made and wouldn't last as long as something that was made here in America. During the 1970s, American automobiles were being beaten by Japanese imports like Datsun and Honda. Their cars were better engineered, got better fuel mileage, and generally lasted longer and held their value longer than American cars. That seemed to set-off a tidal wave of Japanese products that made Americans think twice about buying American products.

Audio equipment, televisions, and technology were coming out of Japan in great numbers, and names like Sony, Panasonic, and Fuji were added to the Honda's and Datsun's to change American's belief that their American-made products were inferior. Soon, 'Made in Japan' was a badge of quality and integrity. America was hooked on Japanese technology. We didn't care, because what we wanted was a good product at a reasonable price.

When the jingoistic Trump was elected, his mantra of "Make America Great Again" assumed that keeping jobs in America meant that the country would leap forward (or backward) to the time when our products were best and our people wanted them. What he fails to realize is that Americans generally do not care as much about American jobs as they do about quality and affordability. I do not believe that you can convince someone to pay 25 percent more for a product with the caveat that "it's made in America." Your pride in buying American will last only as long as it takes for your first payment to come due.

Trump has already kept 8,000 jobs here, and he isn't President yet. If he does what he says he will do, he will continue this process into his presidency. So, here is my theory on how it will affect us:

One of his ideas is that he will reduce corporate income tax to somewhere in the vicinity of 15%, down drastically from whatever they are paying now - somewhere between 35% and 50%. That's wonderful, until those corporations have to pay their American workers' salaries and health insurance, which costs them much more than doing the same thing in Mexico. You can put money back into the hands of corporations via lessened taxes, but that money isn't immediately available, and is likely to be spent in other areas. As such, prices of products will rise because they will have to cover their production costs. The decrease in income taxes will be spent somewhere, and the costs of keeping those jobs in America will be passed onto Americans.

For the sake of a few thousand jobs, Americans will be asked to pay more for goods and services produced here at a higher cost than before.

He might be able to accomplish that, but where will the extra money come from? Will our salaries increase to keep up with the cost of production? Probably not. Will our standard of living increase substantially so that we can justify this increase cost? No, because the products that we are buying will be the same products we are buying now, except that they will be made in America at a higher cost.

So, what's the idea here? What's in my crystal ball? The only thing a saver can do to counteract the threat of rising prices and inflation: Buy gold and precious metals. Gold is traditionally a hedge against inflation, since the metal retains its value in the face of price increases. There are several ways to do this. You can buy bouillon, which is ridiculous and time-consuming. And of course, you have to sell it at some point, which is an arduous task.

You can buy gold and silver coins - from the U.S. Mint or a retailer. Similar to buying bouillon, you have to sell them at some point, and that is equally time-consuming. You may or may not get true value for your coins, and you also have to add-in the collector value, and good luck with that. You might enjoy looking at the coins, but in the end, all you have is a hunk of metal that has to be graded and certified.

The best way to do this is to buy ETF's of gold and precious metals. They trade on the NYSE or NASDAQ, accurately reflect the going price of gold and silver, and are as easy as a mouse click to buy and sell. There is GLD, the SPDR Gold Index, IAU, the iShares Gold Trust, or DGL the PowerShares Gold Fund.

I have invested in GLTR, the ETFS Physical Precious Metals Basket. It's 60% gold, 30% silver, 6% platinum, and 4% palladium. It's a hedge, but it is available to me through a low-cost app that I use, and I think it's a good mix of precious metals.

Whichever you choose, your results should mirror the overall returns of the gold markets, and if you agree with my crystal ball, you will put at least some of your savings into these vehicles. Rising interest rates have tanked the bond market, the stock market has run to the point that many say a correction is due, and your bank savings account interest will not keep pace with inflation - even in today's environment.

Gold has gained about 7% in 2016, but it is well down from its summer high. The best time to buy quality investments is when the price is low. They are "on sale," as it were. My crystal ball may be fuzzy, or it may be pure crystal. We will see soon enough if Mr. Trump's policies will be a change that America embraces or a colossal boondoggle.

Either way, you will need a solid foundation for your investments, and if you have time to wait and money to invest, I think that the precious metals area is ripe through at least 2017. We'll reconvene in December and take this up again. You can call me an idiot or a genius - and I will accept either moniker.